Sam Wahab, Director of Equity Research – Oil & Gas at Cantor Fitzgerald Europe, has responded to updates from Andalas Energy & Power and Eland Oil & Gas, both currently rated as BUY’s.
Andalas Energy & Power (BUY) – Two new project locations identified alongside Pertamina
ADL LN (0.10p, TP 0.50p), Market Cap: £2.5m (Corporate Stock)
In an encouraging announcement, Andalas has provided an update on its activities with Pertamina, Indonesia’s national oil company, including the identification of a further two gas fields suitable for wellhead IPP development. This is in line with its strategy to develop a portfolio of wellhead independent power projects (‘IPPs’) totalling between 250MW to 500MW of installed capacity fired with gas from existing fields, building a significant integrated gas to power business in Indonesia. Andalas has today confirmed that it has identified two new project locations within its target area of Central Sumatra where there is a significant inventory of gas fields with wellhead IPP potential. We are encouraged by the pace of the collaboration which could potentially see Andalas become a material player in Indonesia’s gas to power outlook. We therefore believe Andalas’ shares represent a unique investment opportunity to gain exposure to a compelling and established hydrocarbon province.
- Relationship with Pertamina bears fruit – Pertamina and Andalas have been focusing their efforts towards identifying projects capable of monetising existing gas discoveries through in-situ power generation. A first project has not only been identified but after passing vigorous technical and commercial scrutiny, in December 2016 an application was submitted for its inclusion in the Republic of Indonesia’s Electricity Supply Business Plan (RUPTL). Andalas is currently working to obtain the required approval after which its first project will be presented to the Energy Minister for final sign-off. Once a project has been approved, exclusive joint development agreements to design, construct, fund and operate the project will be put in place. As Andalas converts the Pertamina relationship into projects, the inherent value in its gas to power proposition will be progressively delivered, in our view, with the first project being the template for subsequent projects providing real opportunity to scale the Andalas investment proposition.
- Retain BUY recommendation – In our view, Andalas’ shares offer investors a low cost entry point into a progressive Indonesian operator, underpinned by a management team with considerable operational and capital markets experience. We also expect the company to grow through its relationship with Pertamina and potentially through near-term acquisitions where asset values are trading at significant discounts to NAV. In the current climate, we continue to advocate companies that pursue low cost development / production strategies and we expect this to be adopted by Andalas. We therefore continue coverage with a BUY recommendation and 0.50p TP.
· Risks – Country risk, geological risk, commodity price fluctuations
Eland Oil & Gas (BUY) – Eland funded for its upcoming work programme at Opuama-7
ELA LN (55p, TP 149p), Market Cap: £106m
Our view: In a positive update, Eland announced a successful borrowing base review with its bank, Standard Chartered, ensuring the company is funded for its upcoming work programme at Opuama-7 which is expected to commence in the near term. Production guidance for the Opuama field’s gross production from Opuama-1, 3 and 7 has been set at 17,500bopd by early H2 2017. On a financial level, the company’s balance sheet remains robust with cash currently standing at US$7.5m. We continue to be encouraged by Eland’s continued operational progress against the backdrop of challenging civil conditions in Nigeria. We reiterate our BUY recommendation and 149p TP.
- Opuama production remains at 8,000bopd – Opuama is currently producing approximately 8,000bopd, from the Opuama-3 well only, with export through shipping ongoing. Since the company’s last announcement (31st March 2017), approximately 120,000bbls of oil have been delivered to the export terminal, with a further circa 40,000bbls to be injected imminently with a US$8.5m receivable due in the coming weeks.
- Redetermination of borrowing base will boost production outlook – The previously announced borrowing base review of Eland’s Reserves Based Lending facility is now complete and set at US$24m. The redetermination was based on the production performance of Opuama-1 and Opuama-3, shipping export route and outlook. The company expects to commence the side-track of Opuama-7 well by the end of H1 2017, and a further US$7m of capex is required for the completion of the Opuama-7 side-track, which is expected to add a further 6,000bopd gross from OML 40. Following a successful side-track of Opuama-7, Eland will look to include this significant increase in production in its borrowing base and expects the headroom to increase accordingly to allow for further development funding for OML 40.
- Step change in production once output is regularised – In advance of the material increase in production that is expected from the side-tracking of Opuama-7 and the re-entry and completion of Gbetiokun-1, Eland will look to have secured an alternative route to market. The company is planning to commence the workover and side-track of Opuama-7 by the end of H2/17, which we anticipate will initially add an additional 6,000bopd to OML 40 production. We also expect Eland to commence the workover of Gbetiokun-1 in H2/17, which will deliver at least a further 7,800bopd to production. Furthermore, the company expects to begin development of the Ubima field early production system at the end of the Nigerian wet season in September and upon completion of road and wellsite preparation.
- Attractive fundamentals – Our TP of 149p is comprised of 173p/share in relation to our 10% DCF production and development NAV, and -23.5p/share of financial adjustments (PV of G&A and net debt). We are encouraged that Eland’s operational progress is robust ahead of a near term resumption in crude monetisation. We reiterate our BUY recommendation.
- Risks – Civil unrest, geological risk, government risk, oil price weakness.